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Business Law

Principles and Practices

Goldman, A., & Sigismond, W. (2014). Business Law: Principles and Practices (9th ed.). South- Western Cengage Learning.

Cengage Advantage Books

PRINCIPLES AND PRACTICES

Agreement: Oller and Acceptance

CHAPTER PREVIEW

How Agreement Is Reached

The Offer Offer Must Be Seriously Intended Offer Must Be Definite Offer Must Be Communicated Invitations to Make Offers How an Offer Ends

The Acceptance Acceptance Only by Offeree Acceptance Must Agree with the Offer Acceptance Must Be Communicated to the

Offeror Fax and E-mail Transmission Silence as Acceptance

Forming Contracts Online

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H~GHLIGHTS ·

go A BUSINESS TTING

This chapter discusses the first and foremost element of any contract,

agreement, reached through a process called offer and acceptance. Offer

and acceptance are defined first. Then a discussion of the offer follows: what

is required to make it valid and how it ends. The chapter then presents a

discussion of the acceptance: who can accept, what makes an acceptance

legally binding, and whether a person who has been made an offer assents to

it by remaining silent. A concluding section briefly discusses entering into a

contract online (electronically). This topic will be fully discussed in Part 3,

"Purchase, Sale, and Lease of Goods Under the UCC."

Think of companies using marketing schemes that "get to you." For example, to promote the sale of magazines and other products, one company sent out a packet of information to specific individuals with a letter giving recipients the impression that they were one of perhaps three in their area to be eligible to win a substantial sum of money. All they needed to do was answer the correspondence and say they were interested in the money if it were offered to them. One of the three people had already been declared a winner! The letter also stated that to claim the winnings, the person needed to return an envelope containing answers to questions relating to the winnings, such as, "Would you like the money in a lump sum or in installments?" This statement alone would get people excited. A request asking the person to subscribe to various magazines or buy certain products was also a part of the packet of information provided by the company. There were all kinds of magazines and other products to choose from for purchase.

A packet with these letters was sent frequently over an extended period of time. Each letter contained a new offer to win thousands of dollars to be paid on a certain date, and it always stated that the recipients were one of the finalists. These letters kept everybody's hopes up. The date arrived, but no winners were announced . The company kept advancing the date to announce the winners, and these letters kept asking recipients to buy more products and/or magazines. There was always a statement included with the letter that said "you don't need to make a purchase to win." (This statement keeps the marketing company within the law so their scheme does not appear to be gambling.) However, many people feel compelled to buy the company's products as a way to possibly win a prize. The company does eventually announce a winner (or winners), but by the time the announcement comes, people may have spent a lot of money on magazines and newspapers and most likely were not winners.

Questions 1. Is this company's marketing scheme unethical? 2. Is the scheme illegal? 3. Is any sort of contract with the company involved? 4. Suppose that you got involved with a company that conducted this scheme,

and after expending much time and money, but before the winners were announced, you decided to drop out. Would you simply forget about it, or would you take some kind of action, such as reporting your case to the Federal Trade Commission as an unfair business practice or to the attorney general 's office in your state requesting legal action against the company?

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How Agreement Is Reached

LEARNING OBJECTIVE ~ Demonstrate an understanding of

the process by which agreement is reached.

offer: promise made by one person to do someth ing if another person either performs an act or prom ises to do or not do someth ing

acceptance: agreement by offeree to do what offeror requests in offer; agreement by sel ler of real property to buyer's purchase offer

offeror: one who makes an offer

offeree: one to whom an offer is made

The Offer

LEARNING OBJECTIVE ~ Summarize the requirements of

a valid offer and how an offer ends.

Offer and acceptance, often called mutual assent or a meeting of the minds. the process by which the parties to a contract agree to its terms. These term s be made orally, in writing, or by conduct of the parties that recognizes the e;.- - tence of a contract. Once there has been a valid offer and acceptance, the pa are well on their way to having a legally binding contract because few proble occur with consideration, competency of the parties, and legality. An offer i~ _ promise by one person to do something if the other person either performs an a.: or promises to do or not do something. An acceptance takes place when the pe-- son to whom the offer was made agrees to do what was requested in the offer. other words, the offeree intends to enter into the deal proposed by the offero- The offeror (promisor) is the person who makes the offer (promise), and th:: offeree (promisee) is the person to whom the offer (promise) is made.

As a town board member in the small community where you live, you scout around looking for a digital design professional to design and produce two-color flyers for an upcoming town celebration. One desigtt e says that she will print 5,000 of these flyers for $500. This constitutes an offer. If you tell her to go ahead and print them, you have accepted her offer. In the eyes of the law, when you tell the designer to go ahead, you create a contract, which means you are liable for your side of the bargain (payment of the $500). But if you tell the designer you're not sure and want to continue shopping around (or don't respond at all and just walk away), you clearly haven't accepted, and no agreement has been reached.

The first step toward making a contract is for the offeror to make an offer (a promise) to the offeree. It is essential that the offer be seriously intended, defi- nite, and communicated to the offeree by the offeror.

Offer Must Be Seriously Intended The offeror must clearly and seriously intend to make an offer to the offeree. When a transaction is related to business, it is normal to presume that the partie - intended the agreement to be legal. But an offer made in jest, anger, or under great excitement is obviously not binding because it is not seriously intended unless the offeree accepts under the reasonable belief that the offeror really wa serious. This is true under modern case law and is based on the objective theory of contracts, which is discussed next.

Objective Theory of Contracts (The Test of Intent) To determine whether an offer has been made, the courts will ignore the subjec- tive intention (secret or inner feeling) of the offeror and look to his or her words and conduct as understood by a reasonable person (in this case, the offeree) . The theory is that a party's intention to enter into a contract is judged by objective facts such as what the party said while making the offer, how he or she said it, and how it could be interpreted by a reasonable (average) person. If the offeree, as a reasonable person, interprets a statement by the offeror who appears to be in a serious frame of mind, it can be accepted by the offeree regardless of what the of- feror actually intended or meant. For example, as a joke, you offer to sell a frien d an expensive painting worth $1,000 for $100 . Your friend, who knows nothing about paintings, accepts the offer. If your friend is honestly unaware of your secret intent (that you were joking), a binding agreement will result. On the other hand, you as a property maintenance specialist with a grass-cutting business and work- ing out of your garage, recently purchased two brand new expensive riding

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inary negotiations: in contract :: scu ssions between parties that

ead one party to make an

lawnmowers that were giving you trouble. You were working on them in your backyard. Your neighbor next door saw that the mowers would not start and that you appeared extremely angry. She knew that you were irritated when you offered to sell the two lawnmowers to her for $20. It should be obvious to the neighbor under these circumstances that you were not serious. Consequently, your offer is not binding even if your neighbor accepted.

Offer Must Be Definite An offer that is indefinite- essential terms such as parties, time for performance, quantity, price, subject matter, are omitted, or other material terms are vague or ambiguous-cannot be accepted. A court will not enforce contracts with unclear terms because the court will be unable to determine whether both parties intended to contract.

Bennett says to Haas, "I can sell you two antique chairs from my collection at $2,000 per chair." Haas replied, "I'll take them."

In this case, the law would not view Bennett's statement as a bona fide offer because it was too indefinite. Bennett's statement was simply one of intention to sell the antique chairs at some time in the future. To rise to the level of a bona fide offer, Bennett would have had to make a statement such as, "I offer to sell you two antique chairs from my collection at $2,000 per chair." Actually, the type of statement Bennett made to Haas may be the start of what is called pre- liminary negotiations, whereby the potential offeror "sounds out" the potential offeree's intention to enter into a contract. The parties will talk back and forth until one party eventually makes a genuine offer that can be accepte d. In some cases, as part of the preliminary negotiations, the parties may become a bit more formal and sign a memorandum of understanding (MOU), which is an agree- ment to agree to the terms of a contract at some time in the future. In the past, the MOU was not considered to be an enforceable contract. Modern courts, however, think differently. They consider an MOU enforceable if it is determined from the essential terms in the memorandum that the parties intend to be bound.

Offer Must Be Communicated The offeree must know that an offer has been made and must know the terms of the offer. If not, there can be no legal acceptance by the offeree. The offer may be communicated orally, as by telephone, face-to-face, or in written form, as by let- ter or telegram. In either case, the offer must be communicated directly from the offeror, or the offer is not valid.

You mailed a letter to Hughes offering to sell Hughes a used cell phone for $100. The letter was lost in the mail. Because the letter was never delivered, no offer was communicated to Hughes.

An offer may also be implied from the conduct of the offeror. An implied of- fer results, for example, when you deposit the proper coins in the fare box on a bus. Although you do not state your offer in words, the driver understands that

- when you deposit the coins, you are making an offer.

Invitations to Make Offers Businesses frequently offer their goods and services to the public at large through mass media (newspapers, magazines, mail-order catalogs, circulars), radio and television, displays in store windows, price tags on merchandise, and even price quotations that companies send to customers. Most courts, however, consider these forms of advertising to be preliminary negotiations that only invite a poten- tial customer to make an offer to the advertiser to purchase. Legally, they do not contain words of commitment. Because of this interpretation, an advertiser may legally reject what members of the general public may perceive as offers for legit- imate reasons. Most states have advertising statutes that impose civil or criminal

bid: offer made at an auction

liability upon unethical businesspersons who refuse to sell goods or se conformity with the terms of their advertisements.

An advertisement for the Hartman Floor Company appeared in th local newspaper, offering floor tiles at 15¢ per tile. The correct pric was actually 50¢ per tile. Barnhart entered the store and ordered : tiles at 15¢ each. The salesperson refused to sell the tiles at that pric claiming there was an error in the advertisement. Because the neu·s advertisement was only an invitation to make an offer, the store u•.;,s obligated to sell the tiles to Barnhart at 15¢ each.

If the language used is directed specifically to a particular ind iY i, group of individuals and not the general public, an advertisement can cons an offer. The following advertisement is worded in a way that the cou rt probably hold to be an offer: "On Friday, December 6, we will sell one to:-. new Arco washer/dryer for $300 to the first customer who buys $300 wo:- cash merchandise." A vendor who wishes to avoid any legal entanglemenrs a member of the general public over an advertisement being a legal offer s~ provide a conspicuously displayed disclaimer stating that the advertis em only an invitation to make an offer to buy.

At auction sales, an auctioneer invites members of the audience to - offers. At an ordinary auction, called an auction "with reserve," the makes the offer in the form of a bid. Acceptance of a bid takes place wheu - auctioneer either says "sold" or lets the gavel fall. The auctioneer does nor.:; to accept a bid from the highest bidder even after the start of bidding. Typi-~ an auctioneer will reject a bid below the price that the seller is willing to ace_ Until acceptance takes place, an article may be withdrawn from the sa le b auctioneer. Likewise, a bidder may withdraw a bid before it is accepted b:- - auctioneer. All auctions are held "with reserve" unless otherwise announce,

If an auction is announced or advertised to be "without reserve," the .l tioneer may not withdraw the article from sale once a bid has been m ade becomes an irrevocable offer) and must sell it to the highest bidder. The bid..:: however, may withdraw a bid at any time before the auctioneer accepts it. \\. drawal of the bid does not automatically restore a prior bid.

Another type of bid is that made by a contractor, for example, in respo~ an invitation from a large company to build a new building for the compan:- to add on to the current structure. Again, the invitation to submit a bid is no- offer, and the contractor does not bind the company by submitting one. T he rises to the status of an offer once the company has accepted the bid.

How an Offer Ends An offer ends when it is accepted by the offeree. An offer may also end by la,_ of time, rejection, counteroffer, revocation, death or insanity of the offeror or feree, illegality, or impossibility.

Lapse of Time If the offer contains a fixed time limit, the offer ends at that time. When no fi_x=_ time is stated, the offer ends at the end of a reasonable time. What is a "reastv"- able" time depends on the circumstances in each case. Among the factors con ered in determining reasonable time are whether the price of the arri (e.g., shares of stock) changes rapidly, whether the article is perishable, or whethe- the offeror has a chance to sell the article to a third party.

On April 2, Isaac wrote to Leary and offered to sell several household items for $400. Isaac did not state how long the offer would remain ope On November 10, Leary contacted Isaac and accepted the offer. Isaac, however, refused to sell the items to Leary, claiming that a reasonable time had passed and the offer had ended.

· n: refusal of offer by offeree

=:teroffer: offer made by offeree :•or, changing the terms of the a offer

-cat ion: withdrawal of an offer

Rejection An offer is ended by rejection when the offeree refuses the offer made by the of- feror. The offeree cannot later decide to accept the offer. The offer does not end, however, until the offeror actually receives a communication of the rejection from the offeree either directly or indirectly.

Marlo sent Benson a letter offering to sell Benson a vacation home for $200,000. Benson sent a return letter to Marlo stating that she was not interested but thanked Marlo for thinking of her. Two weeks later, Benson changed her mind and sent Marlo a letter accepting the offer. This second offer was not valid because Benson had initially rejected Marlo's offer.

To terminate the offer indirectly, the offeree's language or conduct must be analyzed carefully to determine where the offeror, as a reasonable person, could assume that a rejection has been made.

Frank offers to sell Matthew a used treadmill for $450. Matthew replies, "The price is a little high, but I'll think about it."

In this example , Matthew has not rejected Frank's offer. A reasonable person would conclude that Matthew had not rejected the offer but had simply inquired about the firmness of the offer. Matthew can still accept and bind Frank to the sale of the treadmill (assuming that all other elements of a contract are present).

Counteroffer A counteroffer is an offer made by the offeree to the offeror, changing the terms of the original offer. The counteroffer, which must actually be received by the of- feree, ends the original offer (a type of rejection) and replaces it with a new offer. The two parties now switch roles, and the offeree becomes the offeror. If the original offeror (now the offeree) accepts the counteroffer, a legally binding agreement results.

Darwood says to Megel, "I'll sell you my golden retriever for $350 if you will also buy her puppy for $150." Megel says, "I'll buy the dog, but I really do not want the puppy." This statement amounts to a counteroffer by Megel. If Darwood accepts Megel's counteroffer, agreement has been reached.

A counteroffer may be worded by the offeree in a way that clearly indicates the original offer has not yet been rejected and is still being considered. The offeree may simply wish to find out whether other terms would be acceptable. Under modern law, this inquiry will not prevent the formation of a contract.

Bean offered to sell Rand six CDs for $8 each. Rand replied, "I'm considering your offer, but I think the price is high. Would you take $6 a CD?"

In this example, Rand 's response to Bean's offer does not end the original of- fer. Rand was simply asking about the possibility of getting the CDs at a lower price. He was not indicating an unwillingness to accept the original offer. If Bean states that she will not take anything less than $8 a CD and if Rand agrees to pay this amount, a legally binding contract will result.

Revocation The offeror has the legal right to withdraw an offer at any time before it is ac- cepted. Withdrawing an offer is known as revocation. Revocation becomes effec- tive when it is actually communicated to (received by) the offeree. For ex ample, a letter of revocation mailed January 1 and delivered to the offeree's home or place of business on January 5 becomes effective on January 5. (Note: A rejection must also be received to be effective.) Usually the offeror notifies the offeree di- rectly about the revocation ("I am withdrawing my offer of May 1"). The offer also ends, however, if the offeree indirectly hears about the revocation from

option: agreement to keep an offe r ope n and irrevocable for a certain time

another person or if the offeror does something that indicates revocation, such as selling the subject of the offer to another person.

Thompson offered to sell a dining room set to Corey for $500. However, before Corey accepted the offer, he learned from Moss, a friend, that Thompson had in the meantime sold the set to Kay. Because Corey had not yet accepted the offer, the revocation was legal and ended the offer.

This example also brings out the point that a revocation is possible ever: though the offeror (in this case Thompson) promises to hold the offer open. T he offeror may not, however, be able to revoke the offer, if an option exists. A~ option is actually a contract in which the offeror agrees to keep the offer ope~ for a certain period of time or until a certain date. (The offeror loses the power to revoke the offer for the time mentioned in the option.) What makes the optio- contract irrevocable is that the offeree gives the offeror consideration (genera ll_ money) to keep the offer open. In the preceding example, if Corey had give Thompson $50 as a down payment, an option contract would have been create Without the $50, no option existed, allowing Thompson to withdraw the offe- as she did.

The money given to create an option becomes part of the contract price. I::; the preceding case, if Corey had created an option by giving Thompson a $ · down payment and decided to take the set, the final payment to Thompson fo- the dining room set would have been $450. Keep in mind that the offeree is un- der no obligation to exercise the option. If Corey outright rejected the optio:- contract agreement, she would have lost her $50 and Thompson would have bee~ free to sell the dining room set to someone else .

In some states, a written promise by the offeror to keep an offer open fo r ai: agreed time cannot be revoked even though no consideration is paid by the offeree.

In a unilateral contract, if an offeree has clearly begun to perform the a.:- requested in the offer before the offer is withdrawn and the offeror knows tha: performance has begun, some courts will not allow the offeror to revoke the o::"- fer. This approach is based on the equitable principle of fair play.

You offer your neighbor $250 to repair the damage to your storage shed. In response to your offer and with your knowledge, the neighbor begins the work . At this point, you may not be able to revoke your offer.

An offer that has been properly accepted can no longer be revoked.

On November 25, Crombach sent a telegram to Mayer offering to sell a camper for $1,500. Mayer sent a telegram to Crombach at 11 A.M. on November 26 accepting the offer. Late in the afternoon of November 2 6. Crombach telephoned Mayer and indicated that he was withdrawing the offer. The withdrawal of the offer was ineffective because Mayer had already properly accepted the offer.

A reward offer made to the general public may be revoked in the sa ~:: manner that was used to tell people of the offer. If the announcement of a re- ward, for example, is placed in a local newspaper, it may be revoked by runn i::.= another notice in the same paper. Even a member of the general public who pe-- forms the act requested without knowing that the offer has been revoked can ask to have the offer enforced . It is impossible to give personal notice to a ll r~­ people who had learned of the offer.

Death or Insanity If the offeror dies or becomes insane before the offer is accepted by the offere-:- the offer ends even though the offeree does not know of the offeror's dearh insanity. An offeror declared insane by the courts is incompetent and therefor::

.'2o.r J.>.b.Je .ro .!.'.12.0eLQ-.;:uJ.0 .tbe oJJe..r m.ane o.r tbe co.nse.Quences of makjng the offer.

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Dr. Stoler, an anthropology professor, promised Rissi, a student in his fall advanced anthropology class, that if Rissi obtained tools used during the days of the Rom an Empire with in one month, Dr. Stoler would pay Rissi's tuition at the college for the spring semester. Rissi obtained the too ls through a global anthropology dealer in a large city and gave them to Dr. Stoler. He then asked Dr. Stoler for a tuition voucher for the spring semester. Dr. Sto ler refused Rissi the voucher, claiming that he (Stoler) was joking . Rissi sued in Small Claims Court.

Questions 1. Should Rissi be successful in his court action? Why or why not? 2. Would the court consider Dr. Stoler's offer as unilateral or bilateral?

Chan offered to sell you a set of golf clubs for $175. You accepted the offer a week later, unaware that Chan had just died in a hunting accident. Your acceptance was not effective because Chan's death ended the offer.

The death or insanity of the offeree also terminates an offer. Agreement cannot be reached if the offeree is not alive to accept the offer. Although death ends an of- fer, it does not terminate a contract already formed before the death of one of the parties (except one for personal services). In the previous example, if you had ac- cepted Chan's offer before he died, a legally binding contract would have been made. T he person in charge of Chan's estate would be obligated to sell you the golf clubs.

Illegality An offer ends if the offer itself becomes illegal before it is accepted by the offeree because a law has been passed making the offer illegal.

Kelvin offered Spicer, a contractor, $25,000 to build an addition on her house, which she planned to use as a dental office. Before Spicer accepted the offer, the city passed an ordinance making it illegal to operate such a business in Kelvin's neighborhood. Because the city made it illegal for Kelvin to operate the dental office, the offer ended.

Impossibility An offer ends if the offer becomes impossible to carry out before the offeree ac- cepts it.

You offered to sell a motorboat to a friend for $900. Before your friend could accept the offer, the boat was destroyed in a fire at the marina where it was docked. Because the boat was destroyed, the offer ended.

Answer True (T) or False (F) . 1. A contract will be enforced even if the terms are not clear. T 2 . The statement "I would like to sell my computer for $750"

is a valid offer. T 3 . To determine whether an offer has been made, the courts

rely on the objective theory of contracts. T 4. A co unteroffer ends the original offer and replaces it

with a new offer. T 5 . As a general rule, a person who is made an offer

has a legal ob ligation to reply. T

F

F

F

F

F

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The Acceptance

LEARNING OBJECTIVE ~ Summarize the requirements of a

valid acceptance.

A legally binding agreement is reached when the offeree accepts the offer made by the offeror. Acceptance is the offeree's approval of the proposal made by the offeror. For the acceptance to be valid, it must meet certain requirements. The acceptance must be accepted only by the offeree, agree with the offer, and be communicated to the offeror by the offeree. Keep in mind that acceptance is the usual manner in which an offer is terminated.

Acceptance Only by Offeree Because the offer is directed only to the offeree, only the offeree can accept it. If a person other than the offeree accepts the offer, the acceptance does not result in a legally binding agreement.

You offered to sell Hickman a camera for $150. Hickman refused but told Agnew, a friend, about the offer. Agnew then accepted your offer. Because the offer was intended only for Hickman, Agnew could not legally accept it.

An offer of a reward made to the general public may be accepted by any person who knows of it. This offer is accepted by performing the act requested.

The Tri-State Transit Company placed an ad in a local newspaper offering a $1,000 reward to anyone who furnished information leading to the arrest and conviction of the person or persons who had damaged several Tri-State buses. Holmes, who knew Watson was responsible for the damage, learned of the reward and notified the police. Based on Holmes's information, Watson was arrested and convicted. Holmes acted in response to the reward offer, and the information given to the police led to Watson's arrest and conviction; Tri-State was therefore legally obligated to pay Holmes $1,000.

Most states have concluded that the offeree is not entitled to the reward without prior knowledge of the offer. Some states, however, have ruled that a person may collect a reward with or without prior knowledge of the offer. If there has been partial performance before learning of the offer or reward , modern law generally permits the offeree to accept by completing the re- quested act.

Acceptance Must Agree with the Offer Under common law rules, the acceptance must be a "mirror image" of the offer. In other words, the acceptance must match, term by term, what was requested in the offer (this is the mirror image rule). Any material change in, or addition to , the terms of the original offer automatically terminates that offer. The acceptance then becomes a counteroffer that need not be accepted. The original offeror can, however, accept the terms of the counteroffer and create a valid contract. Coun- teroffers were discussed above.

In a unilateral contract (a promise for an act), acceptance is the doing of the act requested. For example, you say to Fields, "I promise to give you $20 if you rake my yard and trim the bushes." Acceptance of your offer takes place when Fields completes the yard work. This agreement is a unilateral contract because Fields accepted by performance (completing the yard work), not by a promise (that he would complete the yard work).

In a bilateral contract (a promise for a promise), the offeree's promise is the acceptance. For example, you say to Fields, "I promise to give you $20 if you promise to rake my yard and trim the bushes." Acceptance of your offer takes place when Fields promises to do the work requested . This agreement is

rule: a common law rule - contracts stating that an ~.,ce made in response to an :: ndi ng when placed in the

pro perly addressed

a bilateral contract because Fields accepted by a promise (to complete the yard work), not by performance (completing the yard work).

Often, the offeror may not be dealing face -to -face, or does not care how the offeree accepts, or it may not be clear from the offer whether acceptance is to be by a promise or by the performance of an act. In either case, modern law permits the offeree to accept the offer either by promising to perform the act requested (creating a bilateral contract) or by actually performing the act (creating a unilat- eral contract). This is especially true if a sale of goods under the Uniform Com- mercial Code (UCC) is involved (UCC2- 206 (l)(b)).

In very important transactions, it is common for both parties to sign a writ- ten document. If the offeree is required to accept by signing the written docu- ment, which has already been signed by the offeror, agreement is reached when the document has been signed by the offeree and delivered to the offeror.

Acceptance Must Be Communicated to the Offeror An acceptance is not effective until it has been communicated to the offeror. Furthermore, the offeror is in control of the offer. As such, the offeror has the power to determine both the manner (performance or promise) and medium (mail, telegram, fax, etc.) of acceptance. If the offeror asks for performance (a unilateral contract), the offeree can accept only by doing the act requested. If the offeror specifically seeks a promise (a bilateral contract), the offeree can accept only by making a promise. In a unilateral contract, once the offeree completes the act requested in the offer, no further communication to the offeror is re - quired. Acceptance is evidenced by performance. Of course notice may be re - quired by the offeror or by law, or the right to enforce the contract is lost. As a practical matter, however, the offeror must know about the completed act before the promise made to the offeree can be carried out. Because of the problems that can arise from disputes concerning acceptances of uni lateral contracts, courts are hostile to this category of contract. The Uniform Commercial Code elimi- nates many of the common law distinctions between bilateral and unilateral contracts.

You stored your motorcycle at a local motorcycle center for the winter. You agreed to pay a mechanic $100 to make necessary repairs to it. Acceptance took place when the repairs were completed. If, however, the mechanic wants the $100 before the winter is over, you must be notified that the repairs have been completed.

In a bilateral contract, the offeree's acceptance must be properly communi- cated directly to the offeror. When the parties are negotiating orally- face -to -face or by telephone- acceptance is properly communicated when the offeror clearly hears and understands the offeree's acceptance. Problems could arise, however, if the parties involved are not dealing face -to -face. Thus, certain rules have been laid down to determine when the acceptance takes place.

If the offeror specifies that a certain means of communication be used-for example, traditional mail services, a telegram, fax, or FedEx-acceptance takes effect (even though the means used to accept the offer does not reach the offeror) and a contract results as soon as it is properly communicated by the offeree using the mode specified by the offeror. This r ule is often referred to as the mailbox rule, also called the deposited acceptance rule, because once an acceptance has been deposited with the proper means of communication, it is no longer in the offeree's possession. A letter properly communicates acceptance when it is dropped (stamped and addressed) into a mailbox or given to an authorized per- son in the post office to mail. A telegram properly communicates acceptance at the time it is given to the telegraph company to be sent. A majority of courts up - hold the mailbox rules.

Tay, a resident of New York City, wrote to Morasse, of Buffalo, New York, offering to sell a two-volume set of law books at a reduced price. Morasse, realizing that the offer was a "good deal," immediately sent a telegram agreeing to buy the books at the stated price. Morasse's telegra was lost and never reached Tay. An agreement resulted, however, becaus Morasse's acceptance was valid as soon as he gave the telegram to the telegraph company to send.

Ordinarily, the offeror will not insist on a specific means of communica~= the acceptance. Nevertheless, modern court decisions allow acceptance of -- offer to be effective when sent by (1) the same medium the offeror used to se- the offer or a faster means; (2) mail, if the parties are at a distance; or (3) any m.:-- dium that is reasonable under the circumstances. The definition of "reasona b:.: may be a question for a court to decide. Generally, however, the medium of co-- munication chosen by the offeree is considered reasonable if it falls into one the following categories:

• It was the same one used by the offeror, or a faster means. • It was one that the parties customarily used in prior dealings with each oth • It was customarily used within the trade or business in which the parties

are engaged. • It appeared to be appropriate as determined by the language of the offer.

(For example, the offeror sends an offer by fax but indicates that the offer need not respond immediately; an acceptance by letter would probably be considered reasonable under these circumstances.)

There are two exceptions to the rule that a contract is formed when an a.:- ceptance is sent by authorized means. First, if the offeree uses a medium orh<:- than that requested by the offeror (e.g., FedEx overnight delivery is request~­ by the offeror but instead the offeree uses first-class mail, which may take ··- to five days to deliver), acceptance in most states is not effective until the o-- feror actually receives the communication (assuming that the offer is still oper:: If the offer has expired, the offeree's acceptance becomes a counter offer, lea - ing it to the offeror to decide whether to accept. If, however, the acceptance actually received by the offeror in a timely manner despite the means by whi- it was transmitted by the offeree, it is considered to have been effective whe:- sent. If the first-class letter reached the offeror the next day (i.e., at the san:..: time FedEx was due to arrive), the court would consider this acceptanc e .: valid. The second exception occurs if the offeree first sends a rejection but l a·~­ changes her mind and later sends an acceptance. The first communication rf'- ceived by the offeror governs. Thus, if the rejection arrives first, there is - contract.

The offeror may place conditions on the acceptance. The offeror may, example, state that the acceptance must be received by a certain date. If .... offeror's conditions are not met, the acceptance is not legally binding.

Sanford sent a letter to Zebart offering to sell a computer for $3,500. In his letter, Sanford stated, "Acceptance of this offer is not binding unless it is received by me in my office by 5 P.M. on May 1." Zebart's acceptanc would take place only if Sanford receives the acceptance by 5 P.M. on May1.

The mailbox rule applies only to acceptances. Revocations and rejections not become legally binding when they are sent but take effect only when they a~~ received by the offeree and offeror, respectively.

The rules relating to the communication and acceptance of an offer are su · - marized in Table 7.1.

··er

ocation

•ction

eptance

_,::ep tance

Communication of Offer and Acceptance

Offeror

Offeror

Offeree

Offeree

Offeree

Directly When received by offeree

Directly or indirectly When received by offeree

Directly or indirectly When received by offeror

Directly (bilateral agreement) When sent, if the means of communication requested by offeror is used or any reasonable means is used (when none is specified by the offeror)

When received, if the offeree uses a means other than that requested by the offeror

When received, if the offeror specifies that acceptance will not be effective until actually received

By beginning to perform act requested When act requested is completely (unilateral agreement) performed

Fax and E-mail Transmission The mailbox rule does not apply to certain forms of communication, such as when the parties are dealing face-to-face, by telephone or by fax, and in certain cases, by e-maiL Transmittal by fax is instantaneous. Consequently, the offer is accepted as soon as the acceptance is sent. If the document being faxed is to serve as an original (e.g., a contract is faxed), have it signed and notarized before send- ing it: To be extra sure, include a statement on the document indicating that the faxed document and the faxed signature serve as originals. If the document you are faxing is intended as a contract, include language defining the document as the final written agreement between the parties . Better yet, a party should re- quest the original be sent as soon as possible, preferably by overnight maiL An acceptance sent by e-mail generally is presumed to be effective as soon as the of- feree hits the "send" button on the computer regardless of when the offeror reads the e-maiL

Silence as Acceptance As a general rule, the offeree's silence or inaction is not regarded as acceptance, even if the offeror states that it is. An offeree has no legal obligation to reply even if an offer says, "Failure to reply will amount to acceptance."

Huff wrote to Walden offering her $300 for her pedigree show dog. In the offer, Huff stated, "If I do not hear from you within ten days, I shall consider my offer accepted." Walden, the offeree, has no legal obligation to reply to the offer, and her silence cannot be regarded as acceptance. She does not have to sell the dog to Huff.

In some cases, acceptance may be implied by an act of the offeree . For exam- ple, when the offeree silently accepts benefits, knowing that they are not made as a gift, an implied acceptance arises. In such a case, the offeree is equally bound

· unless he or she speaks out and rejects the offer.

Martin, the owner of a fruit and vegetable stand at the farmer's market, buys regularly from Bart, a local farmer. Bart arrived at the farmer's

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market early one morning and left a load of assorted fruits and vegetab /, at Martin's stand. Because Martin had not yet arrived, Bart left a note that included the price. Bart had left fruits and vegetables at Martin's stand in this manner on four other occasions; each time, Martin had accepted and paid for the items. This time, when he arrived at the stand. Martin read the note and tore it up. He left the fruits and vegetables to spoil without notifying Bart that he did not want them. Martin is liable for the price of the fruits and vegetables.

In this example, Martin's silence amounted to an implied acceptance Because he had accepted fruits and vegetables in this manner on four previous occasions, Martin led Bart to believe that Martin would continue to accept fru i-- and vegetables unless notification to the contrary was sent to Bart.

If both the offeror and offeree agree, silence may be considered acceptance For example, you say to a friend who has offered to sell you a set of law bo oks for $250, "If you don't hear from me by Friday, you may assume that I accep- your offer."

Forming Contracts Online ~ -- .. ----· --

LEARNING OBJECTIVE ~ Recognize that contracts may be

formed online.

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More and more legally binding and enforceable contracts are being forme online. This new means of contract has raised many issues that have challenge the paper-based rules. As a result, courts and legislatures are starting to adap- contract law to the unique issues involved in conducting business online. Regard- less of the issues and the changes, electronic contracts must meet the same basi requirements as contracts formed on paper. Since a large percentage of onli ne contracts involve business-to-business or business-to-consumer sale of goods an services, the substance of these new online laws will be discussed in Part 3, "Pur- chase, Sale, and Lease of Goods Under the UCC," the section of this book tha~ deals with the Uniform Commercial Code (UCC), which provides the framewo r'· of rules that deal with business transactions.

Select the best answer from those given. 1. Adams mails an offer to Baker on June 1. Baker receives the offer on June 2.

Adams mails a revocation on June 3. Baker mails an acceptance on June 4. Baker receives the revocation on June 5. A contract was formed on: (a) June 2, (b) June 3, (c) June 4, (d) June 5.

2. Revocation of an offer takes place when: (a) the offeror has been properly notified, (b) the offeree has been properly notified, (c) a proper counteroffer is made, (d) the offeree properly refuses the offer.

3. Sandy offers to sell a computer to Ruth for $1,000. Liz overhears the offer an d says to Sandy, "I accept." Liz's acceptance is: (a) valid, (b) invalid because only the person to whom the offer is made can accept, (c) invalid because Ruth accepted the offer by her silence, (d) invalid because Ruth's silence acted as a revocation.

4. The Men's Clothing Shop offered Maynard a job as a salesperson. No time fo r acceptance of the offer was specified. The offer will terminate: (a) within five business days, (b) after thirty days, (c) after one year, (d) within a reasonable period of time.

5. With regard to an offeree's rejection of an offer, which of the following is not correct? (a) A rejection by the offeree causes an offer to terminate. (b) An offeree who rejects an offer can later accept the same offer and thereby bind the offeror. (c) An inquiry by the offeree to the offeror about other terms that would be acceptable is generally not considered a rejection. (d) An acceptance that departs from the terms of the offer is a counteroffer.

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Points in Chapter • • • _ -~ement, the first and most important requirement

eg ally enforceable contract, is reached through _- a nd acceptance. An offer made by one person,

:feror, is a promise to do something if the other n performs an act or promises to do or not do

~-hi ng. An acceptance is an agreement by that - person, the offeree, to do what was requested in ifer.

- o be legally effective, the offer must be (1) made - ·erious intent, (2) be definite (clearly stated), and

communicated to the offeree.

: · ance

- -eroffer

mailbox rule

offer

offeree

An offer can be ended in seven ways: (1) lapse of time, (2) rejection, (3) counteroffer, (4) revocation, (5) death or insanity of the offeror, (6) illegality, and (7) impossibility.

A legally binding agreement is reached when the offeree accepts the offer. The acceptance must (1) be accepted only by the offeree, (2) agree with the offer, (3) be communicated to the offeror.

More and more contracts are now being formed on- line. Electronic contracts must meet the same require- ments as contracts formed on paper.

offeror

option

preliminary negotiations

rejection

revocation

stions and Problems for Discussion

Jn November 15, Jamison, owner of Rand ~orporation, phoned McBee, owner of AMD ::::onsultants, and offered to hire McBee to design a :omputer system for Rand's technology department. amison offered to pay $100,000 dollars for the job ur required the acceptance to be in writing and the

-.::: eptance received by him (Jamison) no later than _ -ovember 30. On November 30, McBee faxed a

ritten acceptance to Jamison. Jamison's office was :.osed on November 30, and McBee's fax was not :een until December 1 (the next day). McBee's .: - eptance read as follows: "I accept your -1 000,000 offer." On December 2, Jamison sent a -·gned memo to McBee rejecting McBee's _ -ovember 30 fax but offered to hire McBee for a - - 5,000 fee. McBee telephoned Jamison on :::>e ember 3 and orally accepted Jamison's :Jecember 2 offer. Answer the following questions

.te or false and give a reason for each of your ·-swers: . ~cBee's November 30 fax was not an acceptable

method of acceptance. ::. M cBee's November 30 fax was effective when

sent. ::. ~cBee's acceptance was not valid because it was

received after November 30. .:. Jamison's receipt of McBee's acceptance created

a voidable contract. ~ If McBee had rejected the original offer by

telephone on November 27, he could not legally accept the offer later.

· ~cBee's November 30 fax was a counteroffer.

2. O'Mally offers to sell her townhouse to Doctor for $200,000. Doctor asks her if she would be willing to accept $175,000. Is Doctor's offer considered a counteroffer?

3. Park used her digital recorder to record an offer she wished to make to Reape by mail. Her secretary typed the offer and placed it on Park's desk for Park to review. Before the offer had been sent to Reape, Park called Reape, told her what she was doing, and stated that she would mail her the official offer to which Reape could respond. Instead of waiting for the offer to come in the mail, Reape immediately mailed an acceptance to Park. Was this acceptance valid?

4. Read the following case and then answer the questions that follow.

Following the assassination of President Abraham Lincoln on April14, 1865, by John Wilkes Booth and John H. Surratt, one of Booth's suspected accomplices, the secretary of war published the following reward offer in various newspapers:

$25,000 reward to the person who apprehends John H. S. Surratt and a $10,000 reward for information leading to the arrest of John H. Surratt.

Sometime after, a notice revoking the offer was published. Shuey, unaware that the offer had been revoked, reported information on the whereabouts of Surratt to the proper government officials. The information furnished by Shuey led to Surratt's arrest. (Shuey v. United States, 92 U.S. 73, 23 L. Ed. 697)

a. Was Shuey legally entitled to the reward? Explain your answer.

b. If Shuey had provided the information on Surratt before the reward offer was revoked, would he have been entitled to the $25,000? Why or why not?

5. Carpinski, in response to a letter by the Marion School District board of education, submitted a bid on May 1, offering to perform custodial services at Marion High School for a two-year period at a salary of $30,000 per year. At a board of education meeting held on May 13, the board passed a resolution offering Carpinski a salary of $25,000 per year. On May 15, Carpinski received a copy of this board resolution in the mail. Does a contract exist between Carpinski and the board of education?

6. On May 12, Leonard offered to sell Ginrich, an acquaintance, a used washer-dryer for $400. Leonard told Ginrich that he had until May 17 to accept this offer. On May 13, Leonard received an offer to purchase the washer-dryer for $450 from Bolton, a friend. Leonard immediately accepted Bolton's offer. On May 14, Bolton saw Ginrich and mentioned that he (Bolton) had just purchased a washer -dryer from Leonard. On May 15, however, Ginrich notified Leonard that he accepted the offer to buy the washer-dryer for $400. Was Ginrich's acceptance valid?

7. Floyd, who lived in New York City, wrote a letter to Okcum in New Mexico offering to buy a piece of real property that was for sale. On receipt of the letter, Okcum mailed an answer accepting the offer. After the letter was sent, Okcum changed his mind and sent a telegram rejecting the offer. The telegram and the letter reached Floyd at the same time. Did a contract result?

8. On June 1, Essler mailed an offer to Weinberg to sell some household furniture at a special price of $500, stating, "Your acceptance must be received by me no later than June 12." Weinberg then mailed an acceptance on June 7, but due to a postal delay, the acceptance did not reach Essler until June 15. Was Weinberg's acceptance binding on Essler?

Cases for Review

1. Turilli, owner of the Jessie James Museum in Stanton, Missouri, stated that the person shot to death and buried in 1882 as the notorious Jessie James was an imposter and that the real Jessie James lived under the alias of Frank Dalton for many years after he supposedly was shot to death. This statement brought a lot of attention to Turilli's museum. To prove his point, Turilli went on television nationwide and offered a reward of $10,000 to anyone who could prove that his statement was not true. After hearing the offer, a

9. Masters, an antique dealer, promised Shatraw, an international dealer in rare antiques, that if Sharr:- could obtain some rare vases from India within three weeks, he would pay Shatraw's airfare to India to obtain them and, in addition to the cost c: the vases, would give him a bonus of $1,000. Shatraw did obtain the vases within the three-wee period and delivered them to Masters. However, when Shatraw requested his money, Masters claimed that there was no contract because of lack of consideration for the promise he made, and he would not pay Shatraw. Is Masters correct?

10. Dalton Jewelers in Chicago engaged in lengthy negotiations with Repp Realty Company in New York City for the purchase of a new building. The price of the building kept the parties from concluding an immediate agreement. Repp's written offer to sell was $500,000. The representative for Dalton Jewelers finally replied by telegram offering $400,000, saying, "Take it or leave it." Repp Rea lty filed the telegram for future reference but did not respond. Dalton then sent a letter stating that Repp should disregard its prior communication offering $400,000 and that it accepted the offer of $500,0 0 Repp Realty wrote back stating, "The price is now $600,000. Take it or leave it." Dalton promptly sent a telegram to Repp Realty saying that it held Repp r its original offer of $500,000. Is Repp legally bound to sell the building to Dalton Jewelers for $500,00 0?

11. On February 8, Leggett sent a telegram offering to sell Picarro a personal computer. Picarro received the telegram the same day (February 8) . Picarro mailed a letter of acceptance on February 9 at 11 A.M., which reached Leggett on the afternoon of February 12. At 1:30 P.M. on February 9, Picarro received a telegram from Leggett revoking the offer. Was the revocation effective?

12. On April13, Afton offered by mail to sell his lawn-care business to Baird for $175,000. On April 19, Baird telegrammed his acceptance, which wa s delayed and did not reach Afton's office until April 21. On April20, Afton died. Was there a legally binding agreement?

proven relative of Jessie James came forward with substantial evidence that James truly had been killed and buried in 1882, as alleged in the history books . Despite this evidence, Turilli refused to pay the reward. James's relative sued to recover the $10,000. Turilli claimed that his television statement was not a real offer. Had Turilli made a true offer? (James v. Turilli, 473 S.W.2d 757)

2. Monk and Jenkins leased a building they owned to Tuneup Masters for five years. The lease contained a provision to extend the lease an additional five

years by sending a certified or registered letter at le ast six months prior to the expiration of the lease. Within that five-year period, the vice president of T uneup Masters exercised the renewal option by delivering a letter to the U.S. Postal Service and having it certified. This letter to the landlords was lost in the mail. Not having received the letter, the la ndlords refused to renew the lease. Tuneup .\1asters claimed that the renewal was valid even though the certified letter was lost. Is Tuneup -orrect? (Jenkins v. Tuneup Masters, 190 Cal. App. 3d 1, 235 Cal. Rptr. 214) Spanos was three years behind in property tax payments on a building he owned. He listed the property for sale with a real estate agent and was made an offer of $230,000 in writing from D'Agostino. Spanos drew a line through the

230,000 figure and wrote in $235,000, initialed the price change, signed the offer, and returned it to D'Agostino. D'Agostino would not accept the offer as changed . Spanos orally informed D'Agostino that he would restore the price to the original 2 30,000. D'Agostino drew a line through the 2 35,000 figure that Spanos had inserted in the

offer, wrote in $230,000, initialed the change, and returned the offer to Spanos. Spanos, however, never initialed the document after D'Agostino changed the written price back to $230,000. Spanos and D'Agostino never did arrive at a mutually acceptable price. Spanos instead sold the property to another buyer. D'Agostino, upon hearing of this sale, brought an action against Spanos requiring him to sell the property to him.

hould D'Agostino win his case? (D'Agostino v. Bank of Ravenswood, 563 N.E.2d 886)

- T he Mitchells owned a small secondhand store. They attended an auction at a place where they often purchased merchandise for their store. One of the items for sale at the auction was an old safe that had a locked compartment but no key. The safe was pa rt of an estate and sold at the auction for $50. _\ fter the auction, the Mitchells took the safe to a lo cksmith to have the compartment opened. When opened, the compartment contained over $30,000 in cash. The locksmith called the City of Everett police where the Mitchells lived and where the auction took place. The police then temporarily impounded the money until the rightful owner could be identified. Both the Mitchells and the estate -h at initially owned the safe laid claim to the money. W ho was the rightful owner of the money? (City of Everett, Washington v. Mitchell, 631 P.2d 366)

- This case arises over a memorandum of understanding (MOU) between Fluorogas, a ompany that manufactures fluorine generators, and

Fluorine on Call (FOC), owned by the Siegele

brothers who sought to enter the fluorine generator market. FOC entered into a memorandum of understanding signed by both parties. (Generally, a memorandum of understanding is an agreement to agree and could lead to a contract). The MOU granted FOC the exclusive worldwide right to manufacture and supply fluorine generators. In return, FOC agreed to pay royalties. After the parties signed the MOU, FOC purchased a Fluorogas test generator to sell to another company so that this other company could decide whether or not to invest in Fluorogas. FOC claimed that this investment was in violation of the MOU. Fluorogas then notified FOC that it was terminating its relationship with them, stating that they were not bound by the MOU. It was not a binding contract but simply an agreement to agree. The question becomes: Could an MOU under certain circumstances constitute a contract? (Fluorine on Call Ltd. v. Fluorogas Limited et al., 380 F. 3d. 849)

6. Steinberg applied to the Chicago Medical School, paying the required $15 application fee. He was later notified that his application was rejected. He sued the school for breach of contract, claiming that the school did not evaluate his application according to the academic entrance criteria printed in the college's informational brochure. He claimed that the medical school instead made its decisions on criteria that were not listed in the brochure, such as the ability to pledge large sums of money to the school. Was there a contract formed between the college and Steinberg to review his application based on the criteria in the informational brochure? (Steinberg v. Chicago Medical School, 41 Ill. App.2d 804, 354 N.E.2d 58)

7. Zehmer and his wife owned a 4 71 -acre farm. In a restaurant one night, Lucy said to Zehmer that he bet Zehmer wouldn't take $50,000 cash for the farm. When Zehmer replied he didn't think Lucy had the cash, Lucy said he would get it if Zehmer would put it in writing that he would sell him the farm. Zehmer then wrote on a piece of paper, "I agree to sell the ... farm to W.O. Lucy for $50,000 cash." Zehmer said in an undertone at the time that he thought it was a joke. When Zehmer later refused to sell the farm to Lucy, Lucy brought an action to enforce the contract. Is Lucy entitled to purchase the farm? (Lucy v. Zehmer, 196 Va. 493, 84 S.E.2d 516)

8. Ledbetter, sheriff of Dallas County, posted a reward of $500 for the capture of an escaped murderer. Broadnax, not knowing of the reward, captured and returned the prisoner to the sheriff. After he returned the prisoner, Broadnax learned of the reward and claimed it. The sheriff would not pay. Was Broadnax legally entitled to the reward? (Broadnax v. Ledbetter, Tex. 99 S.W. 1111)

9. Morrison prepared a contract in Florida to purchase some Florida land owned by Thoelke. Morrison then mailed the contract to Thoelke, who was in Texas. Immediately after receiving the contract, Thoelke signed it and placed it in the mail, addressed to Morrison's attorney in Florida. Before the contract was received by Morrison's attorney, Thoelke called the attorney and canceled the contract. Morrison, however, recorded the contract. Thoelke filed a lawsuit to have the contract declared void, claiming that canceling the contract prior to its receipt by Morrison was a valid cancellation. Is Thoelke correct? (Morrison v. Thoelke, Fla. 155 So.2d 889)

10. MacDonald Group is the managing general partner of Fresno Fashion Square , a shopping

mall in Fresno, California. The regional mall h a several major tenants as well as smaller stores such as Edmond's of Fresno, a jeweler. Edmond 's signed lease with MacDonald stated that not more than two jewelry stores could be located in the mall. Nevertheless, MacDonald , after expanding the mall, gave notice to Edmond tha t it intended to rent space to other jewelry stores. The lease, however, did not state anything about additional jewelry stores being allowed in the new part of the mall. Edmond's sued MacDona ld. claiming that the lease also applied to mall additions. Was Edmond's correct? (Edmond's of Fresno v. MacDonald Group, Ltd., 171 Cal. App .3d 598)